Economy
All You Need to Know About Trading in Currency Market
Online trading of currencies is gaining momentum all around the world since the last two decades. Africa alone today has estimated approx. 1.3 million forex traders, South Africa and Nigeria are the leading countries with around 400,000 traders locally combined.
The currency market is a decentralized international financial market where buying, selling and exchange of global currencies among buyers and sellers take place.
In the currency market, the values of currencies are determined based on supply and demand, and it is the largest financial market with transactions crossing over $6.6 trillion per day.
The bulk of currency trading volume comes from trading between banks, institutions, governments and companies. But approximately 5.5% of trading volume constitutes of retail investors and this figure is growing.
The advancement in internet, electronic trading tech, the rise of low-cost brokerages and the availability of diverse trading platforms to African traders have caused online trading to gain popularity among retail investors in Africa, especially Nigeria and South Africa.
How does currency or Forex market work? What decides currency rates?
Currency trading is the buying, selling and exchange of currencies like Euro or the US Dollar or any other two currencies against one another; where you give one currency to get another.
If you have travelled abroad or ordered something online from a different country in another currency like EUR or USD, then it is likely you have made a forex transaction.
Currency trading always involves trading between a pair of currencies. In contrast to stock trading where you buy a company’s share, it involves taking a position on a currency pair.
For example, GBP/USD represents the value of how much US Dollars you can buy with one Pound. If you think that Pound’s value will rise, you buy GBP with dollars. If your prediction is right, you could make a profit. Similarly, you can trade any other currency available in the Forex Market.
FX or currency market works on a simple economic concept of demand and supply. For instance, if there are more buyers for the US dollars in the market, its value will appreciate and vice-versa.
The demand and supply are affected by global trade, geopolitical events, interest rates and financial news. These factors create volatility in the currency market which in turn creates an opportunity for traders to speculate on the movements of currency prices.
For example, if the US Federal Reserve announces a higher interest rate, then US dollars will appreciate and other weaker currencies will likely depreciate against it.
What differentiates FX from other financial markets is that it operates 24 hours in different time-zones. It means when the trading day ends in the US, it begins in Japan and Hong Kong. That’s why currency prices are constantly changing.
How are currencies traded?
Currencies are always traded in pairs like EUR/USD or GBP/EUR.
There are mainly four ways how institutions, companies and individuals trade in FX market: spot contracts, swaps, forward and options. Swaps account for roughly 50% of the total FX trade.
Forex Spot, Forward and Swap Contracts
Most actual trade or non-speculative trade of currencies between banks, corporations, the governments take place using contracts like spot, forward and swaps.
In the Spot FX, currencies are exchanged at the current market price or exchange rate. Spot trades are usually settled within 2 days of contract and the majority of currency trading takes place through swaps.
Swap, also known as a cross-currency swap, is an agreement between two parties to exchange two different currencies at a predetermined spot-rate over a period of time. Swaps are more common among financial institutions or governments. Global companies usually get into a currency swap mainly for securing cheaper debts.
The forward contract is similar to spot trading, except in this the currency exchange occurs in the future. A forward contract entails an agreed-upon exchange rate, volume and a specified maturity date. When the contract reaches it maturity date, the buyer has to pay the amount at the agreed-upon exchange rate. The buyer may incur losses if the current spot rate is lower than the pre-agreed rate.
Currency Derivatives
Currency derivatives are of two types options or futures. Currency derivatives are considered one of the best options to manage currency-risks. They are usually exchange-based futures and options contracts. These future-oriented currency contracts can be purchased at a predetermined price and date.
FX Options is a contract where a buyer obtains the right to buy foreign currencies from a seller at a specified rate and date. The buyer, however, is not obligated to buy it. Similar to insurance, the buyer just needs to pay the premium to buy an FX Option. FX Futures contract is similar in nature but parties are obligated to settle the contract.
Multinational corporations usually use FX Options to protect their investments from currency fluctuations.
Locally in Nigeria, the Nigerian Stock Exchange (NSE) is planning to introduce financial derivatives next year. Currently, LCSE offers trading in four asset classes including currencies (both local and foreign). In the rest of Africa, JSE offers currency derivatives on all major currencies against ZAR.
Currency CFDs
A contract for difference (CFD) is an agreement between the two parties (trader and broker) to exchange the difference in the price of an underlying asset at the end of the trade. The difference in price is calculated from the point when the contract opened to when it ended. In CFD trading, neither broker nor the investor owns any underlying asset.
Most retail forex traders trade forex online as CFDs with retail forex brokers. But there are no locally regulated forex brokers in Nigeria.
All the best forex brokers available in Nigeria are foreign brokers that offer CFDs on currency pairs. As online forex trading is still unregulated in Nigeria, traders must ensure they only trade with top-tier regulated brokers for safety of their funds & fair-dealing; like through brokers regulated by FCA or ASIC or CySEC.
How currency trading can be risky?
The Forex market is inherently risky. The risks range from market risks like extreme volatility to other risks like the use of high margin.
Here are some of the risks that you should watch out for:
Market volatility and unpredictability
The forex market can be highly unpredictable. The release of a new economic data or a new bilateral/regional trade deal can cause volatility in the Forex market.
Major currency pairs tend to remain relatively stable. But exotic currency pairs which have lower trading volumes can be very volatile.
Volatile currencies tend to move in any direction based on a market event or even without it in some cases. The unpredictable movement can cause huge losses.
Leverage and margin risk
The availability of high leverage is one of the reasons why currency trading is why so many traders get attracted to it.
Leverage can amplify a trader’s profit but at the same time, the unwise use can cause significant losses.
For example, in a 100:1 leverage factor, a trader could trade USD$10,000 with just $100 margin deposit. So, suppose a currency pair made a 1 pip loss that means loss of $1. If it changes to 50 pips loss than half of your margin money could be gone in seconds.
Counterparty or third-party risk
Risks related to counter-party or market maker or Broker, where they are not able to fulfil your contract or order due to credit risk or volatile market conditions is another major risk factor. And sometimes these counterparties also deal in malpractices.
There have been numerous instances in the past when people were fooled through Ponzi schemes & bad brokers. For the safety of your capital, one must always choose a broker that is regulated by multiple Tier I and Tier II regulators.
Other risks to know
There are other associated risks too with trading currencies including Country risk, Interest Rate Risk, Transaction Risk, Liquidity Risk etc. One must understand all these risks and try to mitigate them before trading.
Another major risk is of losing money. There is no denying that Forex trading is very risky. Roughly 60-70% of traders lose their capital due to different reasons. However, unwise use of leverage is considered one of the top reasons for trading-losses.
One can possibly mitigate some of these risks by adopting a sound trading plan, using leverage (max 1:10) and proper risk management.
By Dipo Olowookere
The Nigerian Exchange (NGX) Limited came under heavy selling pressure on Tuesday, going down by 1.66 per cent as investors embarked on profit-taking after most stocks on the trading platform gained in the past few trading sessions.
It was observed that the industrial goods sector was the most affected yesterday as it went down by 4.99 per cent due to the decline suffered by Dangote Cement and others.
The insurance continued its downward trend during the day as it lost 2.80 per cent, the consumer goods counter fell by 0.27 per cent, and the banking index shed 0.10 per cent, while the energy sector appreciated by 0.29 per cent.
At the close of business, the All-Share Index (ASI) deflated by 1,745.16 points to settle at 103,622.09 points compared with the previous trading day’s 105,367.25 points and the market capitalisation moderated by N1.1 trillion to finish at N63.188 trillion versus Monday’s N64.252 trillion.
Business Post reports that investor sentiment remained weak on Tuesday after the bourse ended with 41 depreciating equities and 23 appreciating equities, representing a negative market breadth index.
Honeywell Flour lost 10.00 per cent to trade at N9.54, Dangote Cement declined by 9.98 per cent to N431.00, Julius Berger crashed by 9.98 per cent to N139.80, Sovereign Trust Insurance decreased by 9.68 per cent to N1.12, and Prestige Assurance tumbled by 9.30 per cent to N1.17.
On the flip side, Northern Nigerian Flour Mills appreciated by 10.00 per cent to N45.10, Livestock Feeds grew by 9.91 per cent to N6.10, Academy Press expanded by 9.90 per cent to N3.22, University Press increased by 9.82 per cent to N4.81, and Neimeth gained 9.76 per cent to quote at N3.15.
During the session, market participants bought and sold 503.3 million shares valued at N12.6 billion in 12,900 deals compared with the 505.8 million shares worth N8.1 billion traded in 14,259 deals a day earlier, indicating a rise in the trading value by 55.56 per cent and a drop in the trading volume and number of deals by 0.49 per cent and 9.53 per cent, respectively.
The most active stock for the session was GTCO with 54.4 million units worth N3.2 billion, Nigerian Breweries transacted 32.2 million units for N1.0 billion, Universal Insurance traded 30.8 million units valued at N22.6 million, AIICO Insurance exchanged 26.6 million units worth N47.2 million, and Chams transacted 20.0 million units valued at N40.9 million.
By Adedapo Adesanya
The federal government is offering two new savings bonds with interest rates between 17 and 18 per cent through the Debt Management Office (DMO).
In a statement by the agency, the country said retail investors can purchase the two-year bond maturing in January 2027 at 17.23 per cent interest, while the three-year paper maturing in January 2028 at a coupon rate of 18.23 per cent.
Bonds are very safe financial instrument that serve as investments because they are backed by the federal government, which promises to pay back the money.
According to the DMO, people can buy these bonds starting January 13, 2025, until January 17, 2025, with allotment expected on January 22, 2025, and the interest to be paid to investors every three months – in April, July, October, and January.
These bonds have some special features. They are tax-free under both company and personal tax laws.
Big investors like pension funds and trustees are allowed to buy them and each bond costs N1,000 each.
However, interested investor can only buy at least N5,000 worth, and can’t buy more than N50 million.
This comes after the Ms Patience Oniha-led debt office said the Nigerian government was offering three bonds worth N150 billion in September 2024.
By Aduragbemi Omiyale
The House of Representatives has said it would make efforts to pass the controversial tax reform bills forwarded to the National Assembly by President Bola Tinubu last year.
Mr Tinubu, in a bid to improve revenue of the government, asked the parliament to pass the bills, but this has been resisted mostly by northern lawmakers and others.
At the resumption of plenary session on Tuesday in Abuja, the Speaker of the House of Representatives, Mr Abbas Tajudeen, assured that the green chamber of the legislative arm of government would prioritise the tax reform bills.
“The legislative agenda of the House for 2025 prioritises the passage of the Appropriation Bill and the Tax Reform Bills, both of which are pivotal to economic recovery and fiscal stability.
“These reforms are essential for broadening the tax base, improving compliance and reducing dependency on external borrowing.
“The House will ensure that these reforms are equitable and considerate of the needs of all Nigerians, particularly the most vulnerable,” Mr Abbas said through the Deputy Speaker, Mr Ben Kalu, who presided over the session.
He also expressed grief over the loss of lives in stampedes in Ibadan, Abuja and Anambra State last month due to hardship in the country.
Several Nigerians died in the stampedes while trying to receive palliatives given to alleviate their sufferings.
“Tragic events, such as the stampedes in Ibadan, Abuja and Okija, during the distribution of palliative aid, underline the urgent need for improved planning and safety protocols in humanitarian efforts. On behalf of the House, I extend our deepest sympathies to the families and communities affected.
“These incidents serve as a stark reminder of the socio-economic hardships facing our citizens and the imperative for policies that tackle hunger and poverty at their roots.
“Turning to the economy, 2024 presented both difficulties and opportunities. While inflation remains a pressing concern, progress in GDP growth and the positive trajectory of economic reforms provide hope for a more stable and prosperous 2025,” the Speaker said.
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